ETFs to bet on as the bull market turns 5

NEW YORK (MarketWatch) — If anyone throws a party for the bull market’s fifth birthday this weekend, sectors like consumer discretionary and industrials will deserve the biggest pieces of birthday cake.

They’ve outperformed and led the S&P 500
SPX, -0.23%
to record highs over the five years since the index recovered from a bear-market closing low on March 9, 2009. The S&P 500 has posted a healthy annualized return of 24% since that low, and these have done even better.

But once the celebration ends, the next question is whether those same sectors and their related exchange-traded funds will keep their lead as the bull market ages into a sixth year.

While strategists have a variety of views on which S&P 500 sectors are likely to fare best in the next 12 months, there are some common favorites. They include tech, industrials and financials. The latter two beat the broad market over the last five years.

One way to bet on those areas is through sector ETFs, such as the Technology Select Sector SPDR
XLK, -0.33%
the Industrial Select Sector SPDR
XLF, -0.32%
and the Financial Select Sector SPDR
XLF, -0.32%

Significantly, there isn’t much enthusiasm among strategists for utilities and consumer staples — defensive sectors that perform better as a bull market ends or turns into a bear market. Related ETFs are the Utilities Select Sector SPDR
XLU, +1.01%
and the Consumer Staples Select Sector SPDR
XLP, +0.20%
.

That suggests the bull market isn’t played out yet, or — if you’re worried and contrarian — perhaps too much complacency.

“I think we’ve got more upside in this bull market,” said Joseph Quinlan, chief market strategist for U.S. Trust, a Bank of America wealth management business. Using a baseball analogy, Quinlan said he views the current advance as in its “sixth inning.”

Industrials as Europe play

Consumer discretionary, tech and industrials are Dave Mazza’s three top picks for the next 12 months. He is the head of ETF investment strategy at State Street Global Advisors, the giant asset manager behind the Select Sector SPDRs.

Consumer discretionary has been in a “sweet spot,” benefiting from Americans feeling a wealth effect from rising home and stock prices, but not suffering a lot from inflation. [Consumer discretionary includes homebuilder stocks as well as Internet services like Netflix Inc.
NFLX, +2.47%
and Amazon.com
AMZN, -0.11%
] Mazza said he expects inflation will remain benign, and consumer discretionary will continue to outperform. The related SPDR is the Consumer Discretionary Select Sector SPDR
XLY, +0.31%
.

Tech should benefit from companies stepping up their replacement of equipment, and industrials will gain from their worldwide reach, Mazza said. He noted the industrials ETF’s top holdings include multinationals like General Electric Co.
GE, -0.08%
, United Technologies Corp.
UTX, -0.42%
and 3M Co.
MMM, -0.15%
.

“They could really benefit from a sustained recovery in places like Europe,” Mazza said.

“One of the best ways to play emerging markets right now is through health care,” Quinlan told MarketWatch. He said the next big thing for that sector isn’t Obamacare, but rather increased spending on health care in emerging markets, as developing nations age and pay to treat diseases that have long affected graying Western nations.

Jaffe: Lessons from the five-year bull market

(4:00)

The S&P hit fresh highs on the heels of the five-year anniversary for the Dow’s bull market run. But MarketWatch’s Chuck Jaffe warns that investors shouldn’t forget how they felt five years ago. Photo: AP.

Parts of health care also seem hot rather than defensive, as the sector is often viewed. “Biotech gives it more of a growth feel,” Quinlan said.

Financials are the top pick for strategists at Bernstein Global Wealth Management. Financial stocks are the most represented sector in their U.S. equities portfolio, said the strategists, who generally don’t use ETFs.

“Banks can do well in a gradually-rising interest rate environment, since under those circumstances their net interest margins tend to rise,” they said in a note last month.

The strategists added that “since a rising tide lifts all boats, financial companies do well in strong economic times, with both retail and business customers seeking more services.”

Betting on specific sectors often flops, so you easily could be better off with a more diversified ETF that tracks the entire S&P 500, such as the iShares Core S&P 500 ETF
IVV, -0.14%
the Vanguard S&P 500 ETF
VOO, -0.17%
or the SPDR S&P 500 ETF
SPY, -0.15%

For example, tech hasn’t outperformed the SPY over the past five years, even though that would have been a reasonable expectation given that sector’s reputation as a smart early- or mid-cycle play.

“One would have expected tech to be a market leader,” said State Street’s Mazza. He said a key factor was Apple Inc.
AAPL, -0.87%
XLK’s biggest holding, disappointing expectations in 2013.

Like Quinlan, Mazza said he views the current bull market as basically in mid-cycle. The energy and materials SPDRs have seen big inflows this year, attracting more than $1.5 billion between the two of them.

These are late-cycle plays, so if the trend continues throughout the year, that could be a sign of an aging bull, but the jury’s still out on that for now, he said. Nonetheless, that’s still a shift.

“Money is beginning to move toward those late-cyclical sectors to start the year,” Mazza said. “In 2013, it was much more about the mid-cycle.”

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.